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30 Sep 2013
What would a US government shutdown mean for markets?
FXstreet.com (London) - As the US stares down the barrel of its first government shutdown in 17 years, neither the Democrats nor the Republicans are ready to give any ground.
The debt ceiling does not represent a cap on future spending, but instead on financing existing commitments. As such, Republicans are trying to tie any increase in the debt ceiling to a cut in federal spending – including a one year delay to the implementation of the Affordable Care Act.
On the other side of the aisle, Democrats want to protect spending, particularly the flagship Obamacare, from Republican pressure to cut.
Each motion passed by the Republican-controlled House so far has been summarily killed by the Democrat-led Senate.
The entrenched fighting between the two parties has not been eased by a belief seemingly held by both parties that the other will shoulder the blame in the event of a shutdown. The GOP believes that the Democrats have to bear the responsibility for refusing to compromise on what it sees as a job-killing measure in the implementation of Obamacare. Democrats look to paint the Republicans as opportunists looking to use the situation to dismantle the healthcare bill.
Market reaction
Historically, Republicans have felt the PR fall-out from a government shutdown, such as the one triggered under Clinton in 1995. However, neither side is going to come out of this stand-off smelling of roses.
The last government shutdown lasted for 3 weeks, between 15 December 1995 and January 6 1996. This followed a 5-days shutdown in November 1995. Reagan-Bush era stand-off were more common (’84 – twice, ’86, ’87, ’90) but all were of a shorter duration (~ 1 week).
In the past, stock markets have continued to rally before, during and after the shutdown, with the dollar holding up to a similar degree. As has been the case this time around, the dollar has weakened heading into a shutdown, before strengthening on its resolution.
Swap spreads remained stable running into shutdowns – rising 0.1bps ahead of the 1995 shutdown. On average, swaps have held their ground through the shutdowns, with some widening afterwards.
In a shut-down, government data releases may be delayed, such as payroll and retail sales figures.
Treasury auctions and principle payments would not be affected by the shutdown.
Today does not of course represent a threat of full government shut down. Instead it will shut down all non-essential spending. Instead, a hard limit for a debt limit increase will hit in late October-early November, putting a stop to social security, medicare and military pay. US Treasury and CDS markets are currently pricing in a resolution to the stand-off before this point and for no CDS event to be triggered, with the majority of the fall-out remaining political rather than fiscal.
Senate will convene at 2 PM ET when it will almost certainly kill the House’s plan that would extend the debt ceiling in exchange for a 1-year delay in the implementation of the Affordable Care Act.
The debt ceiling does not represent a cap on future spending, but instead on financing existing commitments. As such, Republicans are trying to tie any increase in the debt ceiling to a cut in federal spending – including a one year delay to the implementation of the Affordable Care Act.
On the other side of the aisle, Democrats want to protect spending, particularly the flagship Obamacare, from Republican pressure to cut.
Each motion passed by the Republican-controlled House so far has been summarily killed by the Democrat-led Senate.
The entrenched fighting between the two parties has not been eased by a belief seemingly held by both parties that the other will shoulder the blame in the event of a shutdown. The GOP believes that the Democrats have to bear the responsibility for refusing to compromise on what it sees as a job-killing measure in the implementation of Obamacare. Democrats look to paint the Republicans as opportunists looking to use the situation to dismantle the healthcare bill.
Market reaction
Historically, Republicans have felt the PR fall-out from a government shutdown, such as the one triggered under Clinton in 1995. However, neither side is going to come out of this stand-off smelling of roses.
The last government shutdown lasted for 3 weeks, between 15 December 1995 and January 6 1996. This followed a 5-days shutdown in November 1995. Reagan-Bush era stand-off were more common (’84 – twice, ’86, ’87, ’90) but all were of a shorter duration (~ 1 week).
In the past, stock markets have continued to rally before, during and after the shutdown, with the dollar holding up to a similar degree. As has been the case this time around, the dollar has weakened heading into a shutdown, before strengthening on its resolution.
Swap spreads remained stable running into shutdowns – rising 0.1bps ahead of the 1995 shutdown. On average, swaps have held their ground through the shutdowns, with some widening afterwards.
In a shut-down, government data releases may be delayed, such as payroll and retail sales figures.
Treasury auctions and principle payments would not be affected by the shutdown.
Today does not of course represent a threat of full government shut down. Instead it will shut down all non-essential spending. Instead, a hard limit for a debt limit increase will hit in late October-early November, putting a stop to social security, medicare and military pay. US Treasury and CDS markets are currently pricing in a resolution to the stand-off before this point and for no CDS event to be triggered, with the majority of the fall-out remaining political rather than fiscal.
Senate will convene at 2 PM ET when it will almost certainly kill the House’s plan that would extend the debt ceiling in exchange for a 1-year delay in the implementation of the Affordable Care Act.